Japan’s Abe vows to put education spending before budget balance

TOKYO (Reuters) – Japan’s prime minister has vowed to make education and childcare a priority over ambitious fiscal reforms after winning a new mandate from voters on Sunday, as a rapidly-ageing population threatens to undermine his efforts to reflate the economy.

Japan’s Prime Minister Shinzo Abe, leader of the Liberal Democratic Party (LDP), smiles during a news conference after Japan’s lower house election, at the LDP headquarters in Tokyo, Japan October 22, 2017. REUTERS/Isse Kato – RC19EC7CAA10

Prime Minister Shinzo Abe’s ruling Liberal Democratic Party (LDP) and ally Komeito scored a landslide victory at the polls, boosted in part by his campaign promises to invest more heavily on education and childcare.

With his “Abenomics” growth strategy centered on hyper-easy monetary policy likely to continue, Abe will also step up the pressure on cautious Japanese firms to spend their record cash piles on boosting employees’ wages to stoke sustainable growth.

Abe swept to power in late 2012, pledging to pull Japan’s economy, the world’s third largest, out of nearly two decades of deflation and stagnation. The economy is recovering gradually but sluggish wage growth keeps consumer spending and inflation from accelerating, while corporations face labor shortages due to a low birth rate and fast-ageing population.

The premier promised to offer free pre-school for all children aged three to five and for children aged two or below from low-income households.

“The key to Japan’s sustainable growth is how we respond to ageing of the population, which is the biggest challenge for Abenomics,” Abe told a news conference.

“We aim to exit deflation by accelerating wage growth through innovation on productivity. We will promote human resources, proceed with free pre-school education in one spell and we are going to offer free higher education for the children who truly need it.”

If free pre-school education is applied to all children now, it would cost 1.2 trillion yen ($10.54 billion), government estimates show.

SMBC Nikko Securities estimates that free pre-school education would relieve households of a financial burden of around 1 trillion yen. If half the reduced cost is spent on consumption, that would push up real gross domestic product by 0.1 percent, Nikko says.

Furthermore, Abe has vowed to expand education benefits with the aim of offering free higher education for low-income households.

Abe said he would go ahead with a planned sales tax hike to 10 percent from 8 percent in 2019 and use some of the revenue to create a “social security system for all generations”, by diverting the funds to education instead of paying down public debt.

That would make it “impossible” to meet an ambitious pledge to balance the primary budget — excluding debt-servicing and new bond sales — by the year ending March 2021.

While Abe’s plan to spend more on education and childcare have helped buoy stocks of some related companies such as JP-Holdings Inc that operates nursery schools, the spectre of bigger spending raises concerns about looser fiscal discipline.

Fiscal reform is a matter of urgency. Japan’s public debt tops twice the size of its $5 trillion economy, making it the industrial world’s heaviest debt burden.

Nonetheless, Abe, who prioritises growth, has pushed back the primary budget-balancing target without setting a new goal yet, while vowing to compile by the year-end an extra spending plan worth around 2 trillion for human capital investment.

“Simply boosting benefits for all generations means politically putting off the pain to future generations, which can be criticized as pork-barrel spending,” said Yasuhide Yajima, chief economist at NLI Research Institute.

“Diverting sales tax revenue could open the door to expanding fiscal spending further. In order to prevent fiscal discipline from slipping, Japan must continue efforts needed to restore public finances.”